Kiwis facing a critical choice

New Zealand’s political economy must be compared with Australia’s to be properly understood. In Australia,
Bob Hawke
,
Paul Keating
and
John Howard
are modernising heroes who laid the foundation for Australia’s prosperity: politicians everywhere try to claim they are in their tradition.

In New Zealand, this is not the case. Conventional wisdom says the Lange/Douglas and Bolger/Richardson governments were extremists. Reform is a dirty word. However, in an election campaign cut short by Rugby World Cup celebrations, attention is turning to the economic challenges facing the nation, which are sobering.

Over the past decade, government spending rose from $NZ34.5 billion to $NZ70.5 billion, a real increase of 57 per cent. Meanwhile, total government involvement as a share of the economy grew from 35 per cent to 45 per cent, a full 10 percentage points more than in Australia. This year it is actually 49.9 per cent, due to the Christchurch earthquake.

This jump in expenditure, coinciding with static revenues, has meant that since 2008 the government has run deficits. This year the deficit is a staggering $NZ18 billion, or 9 per cent of the economy. Half this figure is the result of the earthquake, but half is a structural deficit of 4.5 per cent of gross domestic product or about $NZ9 billion. This compares with a 1.5 per cent deficit in Australia.

Even more seriously, it is rarely reported that although New Zealand officially went into recession in 2008, the tradables sector has been in recession since 2004-05. Meanwhile, the non-tradables and government sectors of the economy grew apace.

This downturn was covered up by the stimulatory effect of massive spending. For all this cash, social indicators barely improved, productivity growth is low, and New Zealand’s middle classes are trapped by high effective marginal tax rates created by an insidious welfare scheme called, ironically, Working for Families. The state has also renationalised a number of assets.

The election, however, apart from oblique references to paying down debt, has concentrated on other issues. The primary economic issues being fought over are: partial privatisation, minimum wages, unemployment, introducing a capital gains tax, Australian migration, jobs and who has the best “economic plan" for New Zealand.

The most emotional issue is privatisation, which the Nationals are proposing to resume and which many voters are opposed to. The Nationals propose an initial public offering of 49 per cent of four state-owned electricity companies for “mum and dad shareholders".

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While a move in a positive direction, this is hardly radical policy. Minimum wages are more interesting. The Nationals and their potential coalition partner, the free-market ACT Party, reject a minimum wage increase. All other parties favour an increase from $NZ13 to $NZ15 an hour on the spurious basis that “business can afford to pay" and that “wages are a third higher in Australia". This is despite evidence that since the youth minimum wage was scrapped in 2008, there has been a substantial spike in youth unemployment.

This is where the debate about an “economic plan" comes in. The National party argues that cutting costs, removing red tape, cutting bureaucracy and reducing government spending over the medium term will encourage growth, wage increases and will increase employment: slow reform bringing the public along.

Labour and the left-wing parties basically argue that there is no “jobs plan". Their proposals are varied, but all signal 1970s-type policy solutions: introduce a capital gains tax (housing exempted), change the nature of Reserve Bank independence (the dollar is apparently too high), create make-work schemes, pick (often green) winners, raise taxes and minimum wages, and create food exemptions in New Zealand’s mercifully clean and world-leading goods and services tax.

Essentially it is a choice between a timid government desperate to be moderate moving in the right direction, and an economically illiterate five-headed beast, parts of which yearn for the days of 1970s Fortress New Zealand.

Prime Minister
John Key
is the most popular leader in the world (52 per cent approval), and the country has responded to his straight-talking, open manner and pragmatic, moderate conservatism.

His National party should win the election.

But with economic storm clouds gathering, and record numbers of young, skilled Kiwis migrating to Australia, moderate and popular reforms may no longer be a luxury the Prime Minister can afford.